Why Would Anyone Buy Stocks When They Are Selling High?

Sunday, 05 July 2009 19:22

Q. Say I have stocks that went up in value. For instance I bought them for $2 per share and after 6 months, the value went up to $10. Then let's say I want to sell it at that price. How will I ever find a buyer who would buy it at $10 if common sense tells me that if you want to buy stocks, you would wait it out until the price becomes cheaper and not when it's expensive? In short, what's the use of having stocks that have increased at let's say, 20% of its initial value if nobody would want to buy it at such a high price?

A. You are right. However, the markets aren't just limited to investors who buy low sell high. Most trading volume on exchanges is made by financial institutions, such as investment banks and hedge funds, who run completely different strategies.

You might want to buy the stock at $2 and sell at $10, but many of these sharks should buy at $10.00 and sell at $10.01, do it a thousand times a day to 10,000 stocks, and lock in the profit. Their commission per stock is much lower than yours, so the profit is still there.

And then there are market makers, who work under contracts to buy and sell whenever an order comes in, regardless of the price. So, the market infrastructure is such that most of the time you are able to realize your profit at $10, unless your order is so large, that even those institutions cannot absorb it.

Good luck!

Moni.